Fitch Ratings has assigned a final rating of ‘BBB’ to the USD1.5bn Basel III-compliant Tier 2 ten-year subordinated notes issued by Mizuho Financial Group (Cayman) 3 Limited, a wholly-owned subsidiary of Mizuho Financial Group, Inc. (Mizuho; A-/Stable). The notes are fully and unconditionally guaranteed by Mizuho on a subordinated basis. This is the first cross-border Basel III-compliant instrument issued by a Japanese banking group.

The notes will constitute unsecured and subordinated obligations of Mizuho Financial Group (Cayman) 3 Limited and rank pari passu among themselves equally with all other present and future unsecured, unconditional and dated subordinated obligations. The notes are scheduled to be issued on 27 March 2014 and due on 27 March 2024. They carry a fixed coupon of 4.6% annually. The notes include a non-viability clause and will qualify as Tier 2 capital for Mizuho.

Mizuho Financial Group (Cayman) 3 Limited will use the proceeds of the notes to extend a subordinated loan to Mizuho’s banking subsidiary, Mizuho Bank, Ltd. (MHBK; A-/Stable), for which the loan will qualify as Tier 2 capital.

KEY RATING DRIVERS

Fitch rates the notes two notch below Mizuho’s Long-Term Issuer Default Rating (IDR). This is to reflect their poor recovery prospects relative to senior unsecured instruments given their subordination and the prospect of full and permanent write-down of the securities upon Mizuho reaching the point of non-viability (PONV). The PONV trigger is fully contractual and explicitly refers to a particular event: when the Japanese Prime Minister confirms that the Specified Item 2 Measures set forth in Article 126-2, Paragraph 1, Item 2 of the Deposit Insurance Law needs to be applied to Mizuho.

The notes have been notched from the bank’s IDR (the anchor rating) based on the agency’s view that Mizuho is a systemically important financial institution (FI) in Japan. Fitch believes that support can be factored into such instrument ratings issued by systemically important and complex FIs because Japan’s Deposit Insurance Law enables the government to pre-emptively provide financial assistance to such FIs when necessary under Specified Item 1 Measures of Article 126-2, Paragraph 1, Item 1 or Item 1 Measures of Article 102, Paragraph 1, Item 1. No further notching for non-performance risk applies for the Tier 2 notes in the absence of any more easily hit triggers that would result in coupon deferral.

Under Fitch’s methodology the instrument would not qualify for any equity credit.

RATING SENSITIVITIES

Any changes to Mizuho’s IDR would impact the issue’s rating. The IDR is sensitive to any change in assumptions around the probability of the Japanese government providing timely support to Mizuho as the rating is at the Support Rating Floor (SRF) of ‘A-‘.

Changes in the resolution framework that increases the risk of the PONV being triggered or changes in assessment of Mizuho’s systemic importance that reduce the likelihood of pre-emptive support would lead to a downgrade of Mizuho’s SRF – and potentially the rating on the Tier 2 bonds. Japan’s sovereign rating (A+/Negative) being downgraded to below ‘A’ would also result in a lower SRF.

The prospect for an upgrade of the IDR is limited as it requires an unlikely upgrade of the Viability Rating (VR) by more than two notches. Currently, Mizuho’s VR is at ‘bbb+’, one notch below its ‘A-‘ IDRs.